Monday, January 27, 2014

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jan 24, ‘14

S&P 500 Index Chart

In last week’s post, the daily bar chart pattern of S&P 500 seemed to be in complete control of bulls as it touched a new lifetime high of 1851. However, there were technically bearish signs that warned of a serious correction – negative divergences on the technical indicators, a wide gap between the 50 day and 200 day EMAs and the formation of a ‘broadening top’ pattern.

The concluding comments in the post are worth repeating: “On longer-term weekly chart (not shown), the index looks way overbought. Take some profits off the table. Live to fight another day.” If you did book profits, don’t be in a hurry to re-enter. The index is likely to correct some more.

Daily technical indicators have turned bearish. MACD is still in positive zone, but is falling rapidly below its signal line. RSI and Slow stochastic have both dropped sharply below their respective 50% levels.

Note that the 200 day EMA is rising and the index is trading above it. That means the long-term bull market is under no threat yet. However, the spike in volumes as the index plunged below its 50 day EMA on Friday means that bears aren’t quite done yet.

FTSE 100 Index Chart

There were some worrying technical signs for bulls in last week’s analysis of the daily bar chart pattern of FTSE 100. MACD and Slow stochastic were looking overbought and RSI showed negative divergence.

Some consolidation was expected, but not a sharp correction. Looks like bears took a leaf out of the book of S&P 500 bears and decided to take some profits home. The index dropped below its 50 day EMA like a stone. At the time of writing this post, FTSE has fallen a further 2% - below the 6600 level to test its rising 200 day EMA.

Daily technical indicators have begun to turn bearish. MACD is positive, but is falling below its signal line. RSI has dropped below its 50% level. Slow stochastic has fallen sharply from its overbought zone to its 50% level.

There is no immediate threat to the long-term bull market. The profit booking is probably due to worries about slowing growth in emerging markets. Wait for the correction to play out before re-entering.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 indices are facing corrections in long-term bull markets. The dips are providing adding opportunities. But waiting for the corrections to play out may be prudent – just in case they turn into a bear phases.